Japan's record bank profits mask a rise in bad loans and capital pressure

The megabanks have raised their provisions amidst the Middle East conflict.

The impaired loan ratios of Japan and Australia are expected to rise in 2027 compared to 2026, according to estimates from Fitch Ratings.

Both banking systems’ impaired loans to gross loans ratio are expected to rise to 1.5% in 2027, from just above 1% in 2026.

Japanese banks’ capital ratios are set to decline in 2027, alongside the US, whilst Germany and Switzerland are likely to have the highest capital ratios. Italy will remain one of the most profitable banking markets, Fitch added.

“We still expect impaired loans for rated banks to edge higher in some markets over 2026-2027, reflecting slowing growth, higher borrowing costs and post-pandemic credit normalisation.” Fitch said.

Japan’s three megabanks have raised their loan loss provisions amidst the US-Israel war with Iran, according to a separate report by S&P. MUFG in particular tripled its loan-loss provisions, whilst Mizuho’s was doubled.

Japan’s major banks saw net profits rise 32.7% year-on-year (YoY) to $37.25b in the fiscal year that ended on 31 March, data from the Financial Services Agency (FSA) showed. 

Growth in domestic net interest income, lifted by both higher loan volume and improved margins, raised the banks’ profits, the FSA said.

Despite the higher profits, the megabanks’ deposits are growing at a slower rate than their loans—a trend that can potentially crimp their security investments and lending, said S&P Global Market Intelligence.